EXPLORING RELATIONSHIP BETWEEN STOCK MARKET INDICES AND INDIA VOLATILITY INDEX USING ECONOMETRIC ANALYSIS

Abstract

Actions in the market are dependent on emotions of market participants which are indicated by volatility. Rising and dwindling of volatility are at all times an indication of the amount of panic that surrounds the sentiment. For example, when fear towers, stock markets see high volatility. India VIX signifies how investors sense the instant future. Retail investors, can pursue India VIX to chart out successful entry and exit in stocks. Such an index is more pertinent for short-term traders, who are dependent on feelings of the market to a great degree. It illustrates market harmony with respect to anticipated volatility and is useful in foretell uncertainty in the market. This aids a portfolio manager to reduce risk and categorize wrongly priced options. In this context the present study aims to check if Sensex and Nifty have a spillover effect on the volatility index (India VIX). The study also examines the presence of volatility clustering in the data set. Results of LM ARCH, GARCH and EGARCH suggest that Sensex and Nifty affect India VIX and presence of volatility clustering was confirmed. Unfavorable information in the market also seemed to have an impact on India VIX.

Keywords: Stock Market Volatility, Sensex, Nifty, India VIX, GARCH.

JEL Classification: G170